November 2, 2008 US Technology Strategy Independent Insight: IT Spending Survey 2009 under the knife – expect -1% global decline Expect global slowing in IT spending Balancing developed market declines of -5% for 2009 against emerging market growth of 7% we triangulate to a -1% decline globally. This compares to 6% estimated global growth in 2008 and 9% in 2007. CIO feedback underscores spending contraction Our reading on total IT spending is the lowest in the history of the survey (since 2002). Our total IT spending index came in at 38.8, down from 51.0 in our prior survey, implying meaningful contraction. 4Q budget flush severely capped Fifty-two percent of respondents have seen budgets decrease for 2008 in the past three months, likely pressuring any sort of 4Q budget flush. Forty-one percent of our survey believes spending will be less in 4Q versus recent years. Services pressured; caution on Indian IT Services ticks up Results for services mark a new low point. Appetite for offshore services remains well below trend, and we remain cautious on the space, with both TCS (TCS.BO) and Wipro (WIT, WIPR.BO) rated Sell. Software weakens; Microsoft the exception Software spending intentions dropped to just in line with overall budget commentary, having been flagged as more resilient prior. Applications are most at risk, SAP (SAP) drops out of the top group, and we remain sellers of salesforce.com (CRM) and NetSuite (N). Microsoft (MSFT) enterprise products driving relatively better expectations of spending; in mobile arena, catching up to RIM (RIMM). Networking softer; Cisco positive, best-of-breeds pressured Networking spending intentions softened in line with the overall reining-in of spending intentions. We remain on the sidelines for most stocks in this area. The notable exception is Cisco (CSCO), where share gains partially mute the impact of weaker spending. THIS IS THE 43 RD ISSUE IN OUR IT SPENDING SURVEY SERIES. OUR SURVEY PANEL IS MADE UP OF 100 MANAGERS WITH STRATEGIC DECISION-MAKING AUTHORITY AT MULTINATIONAL FORTUNE 1000 COMPANIES. Sarah Friar (415) 249-7436 | [email protected]Goldman, Sachs & Co. James Covello (212) 902-1918 | [email protected]Goldman, Sachs & Co. Derek R. Bingham (415) 249-7435 | [email protected]Goldman, Sachs & Co. The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research
Transcript
November 2, 2008
Goldman Sachs Global Investment Research 1
November 2, 2008
US Technology Strategy
Independent Insight: IT Spending Survey
2009 under the knife – expect -1% global decline
Expect global slowing in IT spending
Balancing developed market declines of -5% for 2009 against emerging
market growth of 7% we triangulate to a -1% decline globally. This
compares to 6% estimated global growth in 2008 and 9% in 2007.
CIO feedback underscores spending contraction
Our reading on total IT spending is the lowest in the history of the
survey (since 2002). Our total IT spending index came in at 38.8, down
from 51.0 in our prior survey, implying meaningful contraction.
4Q budget flush severely capped
Fifty-two percent of respondents have seen budgets decrease for 2008
in the past three months, likely pressuring any sort of 4Q budget flush.
Forty-one percent of our survey believes spending will be less in 4Q
versus recent years.
Services pressured; caution on Indian IT Services ticks up
Results for services mark a new low point. Appetite for offshore
services remains well below trend, and we remain cautious on the
space, with both TCS (TCS.BO) and Wipro (WIT, WIPR.BO) rated Sell.
Software weakens; Microsoft the exception
Software spending intentions dropped to just in line with overall
budget commentary, having been flagged as more resilient prior.
Applications are most at risk, SAP (SAP) drops out of the top group,
and we remain sellers of salesforce.com (CRM) and NetSuite (N).
Microsoft (MSFT) enterprise products driving relatively better
expectations of spending; in mobile arena, catching up to RIM (RIMM).
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
November 2, 2008
Goldman Sachs Global Investment Research 2
Table of contents
2009 IT spending forecast down 1% globally: Negative in developed economies; growth still evident in emerging markets 2
End-market demand: Almost every vertical likely to soften in 2009 given broad-based nature of macroeconomic declines 7
Latest IT Spending Survey results: Indices continue sharp retreat, now indicating contraction 8
Segment focus: Professional services and hardware tend to be a top focus for spending cuts 12
Vendor focus: Who is gaining share of the shrinking budget? 13
Sub-sector focus: Hardware 17
Sub-sector focus: Software 21
Sub-sector focus: Services 23
Sub-sector focus: Networking 27
Respondent overview 32
Disclosures 34
2009 IT spending forecast down 1% globally: Negative in developed economies; growth still evident in emerging markets
• We estimate IT spending in developed economies will contract 5% in 2009. We
triangulate on the outlook for economic growth, capital spending, and corporate
profits – as well as our latest IT Spending Survey results – to conclude that tech
spending in the developed economies (the United States, Western Europe, and Japan)
is likely to decline by about 5% in 2009. This compares to 4% expected growth in 2008
and 7% growth in 2007.
• We expect 2009 emerging economy IT spending growth of 7%. The Goldman Sachs
Economic Research outlook for capital spending in emerging economies for 2009 is
growth of about 7%. We assume IT spending should trend about in line with this
estimate. The 2009 outlook for emerging markets compares to 10% expected growth in
2008 and 12% growth in 2007.
• Developed market declines offset by emerging market growth leads us to our
forecast of -1% global IT spending growth for 2009. We estimate that developed
economies account for about 65% of total IT spending, with emerging economies
making up the balance. The weighted global spending forecast thus comes to
contraction of about 1% in 2009, compared to our estimate of 6% global spending
growth in 2008 and 9% growth in 2007.
Aligning bottom-up with top-down analysis
Aligning with this IT spending forecast, each coverage group within Goldman Sachs US
Technology Research is forecasting a significant deceleration in growth in CY2009 from
the growth rates seen in CY2008 (see Exhibit 1). We note it is difficult to triangulate exactly
from a global IT spending forecast to our individual sector and company coverage growth
rates. However, directionally we are in synch, having the same delta between our forecast
and overall IT spending expectations in both CY2008 and CY2009. The delta is likely driven
by some bias on the size and quality of companies under coverage, some M&A that does
not get removed in our bottom-up builds, and finally the overall capital spending data we
use does not cover some of the more ratable and recurring revenue streams such as
software maintenance, for example.
November 2, 2008
Goldman Sachs Global Investment Research 3
Exhibit 1: Goldman Sachs US Tech Research bottom-up revenue growth projections vs. IT
spending forecasts
GS Sector Coverage Group GS Revenue Growth EstimatesCY2008 CY2009
Indian IT Services 29% 12%Software 13% 5%Hardware 9% 4%US IT Services 13% 4%CommTech 5% 1%Semis -3% -5%GS Average 11% 4%Global IT Spending forecast 6% -1%∆ 5% 5%
Source: Goldman Sachs Research.
We see developed economy IT spending down 5% in 2009, using
the United States as a proxy
Given the increasing correlation between developed economies and the availability of
more robust historical data on US tech spending, we use our US estimate as a proxy for
the major emerged economies, including Western Europe, Canada, and Japan. We
estimate that, together, the developed economies account for approximately 65% of
overall IT spending (see Exhibit 6).
• US GDP growth is expected to slow further. Goldman Sachs Economics Research
currently expects nominal US GDP to slow to 1.9% in 2009, down from 3.8% in 2008
(real GDP is expected to dip to slight contraction of 0.2% in 2009). GDP growth has
historically been a coincident indicator for US IT spending, though tech spending has
tended to contract more sharply than GDP in downturns (see Exhibit 2).
• US business capital spending is expected to contract sharply in 2009. Goldman
Sachs Economics Research expects nominal US business fixed investment (BFI) to
decline 8% in 2009. The sharpness of the decline is due in large part to rapid growth in
structures (offices, industrial buildings, hospitals, shopping centers, etc.), which
outpaced IT investment growth significantly in the middle part of the decade. Thus, a
contraction in tech spending should be less severe than the overall contraction in US
capex, which is consistent with prior cycles (see Exhibit 3).
• Declines in US corporate profits deepened in 2008, which should lead to spending
reductions in 2009. Corporate profits have tended to be more of a leading indicator of
US tech spending, by about a year. Although S&P operating profits began to decline in
2007 (due largely to financial write-downs) and accelerated downward this year, tech
spending continued to grow at a healthy rate. However, 2009 should be the year in
which the impact is most felt in tech as spending is curtailed, though IT spending has
historically held up quite a bit better relative to declines in corporate profits (see
Exhibit 6: We estimate developed economies make up about 65% of IT spending
Estimated share of worldwide IT spending by geography, 2009E
North America30%
Western Europe27%
Japan8%
Asia/Pacific16%
Latin America7%
Middle East and Africa7%
Central & Eastern Europe5%
Source: Goldman Sachs Research, Gartner.
November 2, 2008
Goldman Sachs Global Investment Research 7
End-market demand: Almost every vertical likely to soften in 2009 given broad-based nature of macroeconomic declines
Exhibit 7: Normalized vertical end demand: Financials, communications, manufacturing,
and government are the “Big 4,” making up almost two-thirds of IT spending
Financials and manufacturing likely to see the sharpest contraction in 2009 based on feedback
from CIO conversations
Financial services, 21%
Communications, 16%
Manufacturing, 14%Government, 11%
Business services, 8%
Technology, 6%
Retail, 5%
Healthcare, 5%
Transportation, 3%
Energy & utilities, 3%
Education, 2%Other, 6%
Source: Goldman Sachs Research estimates.
Our conversations with CIOs across many verticals, as well as with management teams in
our coverage, have emphasized the broad-based nature of the current downturn, both by
vertical and by geography. Healthcare is perhaps the only vertical that still appears to be
spending at a more normalized clip, but given its small overall size within IT spending this
is unlikely to be a “needle-mover,” except at the micro level for companies particularly
exposed in that arena.
• Financials: We expect significant spending pressure. As is already well known, we
have seen tightening spending in 2008 by US and European financials companies. In
the US, most financials CIOs with whom we have spoken are planning on IT spending
being down in the range of 10-20% for 2009, with some even suggesting more than
this. We do not expect a rebound from the sector until companies can assess how the
credit and broader macro outlooks are unfolding.
• Communications: Having been one of the healthiest, comms are likely to curtail
spending in 2009. We expect the communications vertical to see about a 7% decline
in capital spending in 2009 globally given macro headwinds and following a few big
years of investment. Comms capital spending growth in 2008 was about 5% in the
United States with about 22% growth in the rest of the world (17% growth in total).
Wireline build-outs to facilitate triple-play broadband and rich audio/visual delivery in
both the home and enterprise will continue to be a focus but will slow for now.
November 2, 2008
Goldman Sachs Global Investment Research 8
• Manufacturing: Capital spending plans remain highly in flux in this vertical. However,
Goldman Sachs analysts’ best estimate is for overall capital spending to be flat to
down 10% from low to mid-single-digit growth in 2008. We expect companies to
remain conservative about the emerged economies in setting 2009 spending targets,
but would expect relatively stronger investment in international markets.
• Government: Spending is likely to soften quite a bit as well. On the local level, we
expect a more pronounced slowdown after stronger spending growth over the past
few years. Tax receipts are set to fall as housing and income impacts feed through the
local economies. At the Federal civilian level, the continuing resolution provides
authorization in civilian agencies to continue spending at 2008 levels. However, this
does impede new program starts. On the Federal DoD side, spending remains intact
and is fully funded. With an administration change, regardless of party, we would not
expect any material change in the near term as the DoD budget has already been put
into law, and the continuing resolution on the Federal Civilian is in effect through
March 2009.
• Technology and Retail: Expect spending to drop as the impact from reduced
consumer spending flows through business models. Currently, Goldman Sachs
analysts expect negative capital expenditure growth from both verticals.
Latest IT Spending Survey results: Indices continue sharp retreat, now indicating contraction
Our IT spending indices, which measure indications of spending growth versus
spending contraction, have reached multi-year lows, now implying year-over-year
spending contraction. Our total IT spending index (which includes salaries, services,
depreciation, occupancy, etc.) came in at 38.8, down from 51.0 in our prior survey in
August, implying meaningful contraction. This reading on total IT spending is the lowest in
the history of our survey (since 2002). Our tech capital spending index (representing
spending only on new equipment and software) dropped to 45.9, versus 53.5 in our prior
survey, also dipping into contraction territory (see Exhibit 8). We note that our respondents
continue to indicate that capital spending is holding up somewhat better than overall
spending, consistent with anecdotal feedback putting contingent labor, professional and
data services at the top of the list of cut-backs. However, this likely reverses next year as
capital budgets are targeted for the next round of cost reductions. Interviews for our latest
survey were conducted in mid-October.
November 2, 2008
Goldman Sachs Global Investment Research 9
Exhibit 8: Both our IT spending indices are now in contraction territory
Goldman Sachs IT Spending Indices
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
Feb-
02
Apr
-02
Jun-
02
Aug
-02
Oct
-02
Dec
-02
Feb-
03
Apr
-03
Jun-
03
Aug
-03
Oct
-03
Dec
-03
Feb-
04
Apr
-04
Jun-
04
Aug
-04
Oct
-04
Dec
-04
Feb-
05
Apr
-05
Jun-
05
Aug
-05
Oct
-05
Dec
-05
Feb-
06
Apr
-06
Jun-
06
Aug
-06
Oct
-06
Dec
-06
Feb-
07
Apr
-07
Jun-
07
Aug
-07
Oct
-07
Dec
-07
Feb-
08
Apr
-08
Jun-
08
Aug
-08
Oct
-08
Spen
ding
Indi
ces
index >50 = expansion
index <50 = contraction
Total IT spending
index
Tech capital
spending index
1 year ago (Oct-07)2 years ago (Oct-06)
Source: Goldman Sachs IT Spending Survey.
Note on our index methodology: Our IT spending indices (shown in Exhibit 8) summarize
our detailed survey data on forward spending expectations (shown in Exhibit 9) simply in
terms of directional changes and in a way that allows a contiguous data series across
years. The indices are determined by a methodology similar to that used by the ISM
manufacturing indices, although our index is more forward-looking in that it gauges
forward-year spending expectations, as opposed to the ISM indices that gauge current
spending levels. Responses indicating spending growth in the coming year receive a
weighting of 1.0, responses of “no change” receive a weighting of 0.5, and responses
indicating declining spending receive a weighting of zero. Thus, an index value above 0.50
indicates expected spending growth, while a value below 0.50 indicates expected
contraction.
Early 2009 reading a similar portrait of contraction; capital budgets
remain more pressured
Although the October reading is still somewhat preliminary as most budgets are not
finalized until closer to year-end or even into the following year, our survey respondents’
early reading on 2009 spending shows an expectation of ongoing contraction in the year
ahead, with an outlook not much different than currently depressed views of spending
contraction to close 2008 (see Exhibit 9). Weighted-average 2009 total IT spending growth
expectations are also in negative territory, but about 100 basis points less severe than our
2008 readings, while weighted-average 2009 capital spending growth expectations are
about 40 bp lower than our 2008 reading. This could suggest that operational and service
cuts may moderate in 2009, while capital spending cuts are more likely to accelerate as
2009 budgets are put in place.
November 2, 2008
Goldman Sachs Global Investment Research 10
Exhibit 9: Early indications from our Survey panel on 2009 spending suggest ongoing contraction of a similar
magnitude to current activity Underlying detail on our spending indices
Total IT Spending
21%
12%
15%
24%
15%
6% 5%
12%14%
10%
35%
21%
7%
0%0%
5%
10%
15%
20%
25%
30%
35%
40%
More than10% lower
5-10% lower Down lessthan 5%
About thesame
Up less than5%
5-10%higher
More than10% higher
% o
f Res
pond
ents
2008 2009
IT Capital Spending
20%
11%
6%
34%
13%
8% 7%
17%
13% 13%
39%
13%
3% 4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
More than10% lower
5-10% lower Down lessthan 5%
About thesame
Up less than5%
5-10%higher
More than10% higher
% o
f Res
pond
ents
2008 2009
Source: Goldman Sachs IT Spending Survey.
Exhibit 10: What is your current expectation of US economic conditions in 2009 relative to
2008?
Oct-08 Oct-07 Oct-06Stronger 11% 18% 25%Weaker 56% 38% 29%About the same 33% 43% 46%
Source: Goldman Sachs IT Spending Survey.
Clearly, CIO views on the economy are driving their views on budget decisions.
November 2, 2008
Goldman Sachs Global Investment Research 11
Fourth quarter budget flush likely capped, as even 2008 budgets
come under the knife
Exhibit 11: How have your IT budget expectations for 2008 changed in the past three
months?
18%
10%
24%
39%
6%
2%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Down greater than 10%
Down 5-10%
Down 0-5%
Unchanged
Up 0-5%
Up 5-10%
% of respondents
Source: Goldman Sachs IT Spending Survey.
Exhibit 12: Which of the following best characterizes your spending intentions through
the end of the current calendar year?
Oct-08 Oct-07 Oct-06 Oct-05Our end-of-year IT spending activity will be similar to recent years 42% 57% 67% 55%Our end-of-year IT spending activity will be greater than recent years 17% 28% 24% 24%Our end-of-year IT spending activity will be less than recent years 41% 15% 9% 21%
Source: Goldman Sachs IT Spending Survey.
Volatile pricing index recovers somewhat but remains at depressed
levels
Our panel suggests pricing discounts remain fairly aggressive. Vendors seem to be
remaining flexible with respect to pricing in an effort to buoy demand in the current
environment (see Exhibit 13). In general, we believe that this favors larger solution
providers who can offer attractive pricing and payment terms on bundles of products
relative to smaller “best-of-breed” vendors who may lack similar flexibility. From an
investment perspective, we believe that this benefits companies such as Cisco, IBM,
and Oracle. Pricing is more likely to be an issue for more focused “best-of-breeds”
such as Aruba Networks, Lexmark, NetSuite, Network Appliance, Riverbed,
salesforce.com, and TIBCO.
52% of respondents have seen budgets decrease for 2008 in the past three months, likely dampening any sort of 4Q budget flush.
In addition, responses paint a tempered view directly on 4Q budget activity.
November 2, 2008
Goldman Sachs Global Investment Research 12
Exhibit 13: Our pricing index is based on respondents’ indications of increasing or
decreasing discounting by vendors to close business
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Feb-05
Apr-05
Jun-05
Aug-05
Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
Jun-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Pric
ing
Inde
x
IT Pricing Index
Higher index value = firmer pricing, benefiting vendors
Lower index value = softer pricing / more discounting
Source: Goldman Sachs IT Spending Survey.
Segment focus: Professional services and hardware tend to be a top focus for spending cuts
We alternate how often we ask questions and hence the segment focus was not updated in
this current round of questions. However, to put the next section on vendor focus in
perspective we are reprising the data from our August survey on how each segment tends
to be viewed by our CIO population as they look for cost reduction (see Exhibit 14).
Exhibit 14: In terms of where your organization sees the greatest potential for cost
reduction in your IT organization, please specify the areas in which you expect to see the
greatest proportion of cost reduction over the next 12 months. Answer all that apply.
In a relatively short 12-month period, our survey respondents expect to dramatically
increase the percentage of their PC servers that are virtualized. On a weighted average
basis, 34% of PC servers should be virtualized a year from now, more than double the 15%
that are virtualized today. More striking, 45% of our respondents expect to virtualize over
30% of their servers, up from just 7% today, suggesting a much more aggressive
penetration of virtualization compared to what we have seen to date. Our sense is that
total cost of ownership (TCO) reductions will be a key driver of the acceleration in server
virtualization deployments as CIOs are forced to cut capital spending and reign in
management, administrative, and power/cooling costs. In our VMware initiation (“Still the
aggressor, but slowing growth & valuation a drag”; published August 11, 2008), our base-
case analysis showed a 30% reduction in TCO, while a higher compression ratio of
physical to virtual servers would allow the savings to increase to 45%-50%. Avoidance of
PC server purchases is the largest source of savings, followed by reduced management
and support costs which more than offset the incremental investment in the server
virtualization software/support itself and storage.
November 2, 2008
Goldman Sachs Global Investment Research 19
Despite the emergence of new competition, VMware should
maintain a large lead over the next two years
Exhibit 22: Who do you currently view as your primary server virtualization providers /
enablers? What do you expect 2 years from now?
82
13
50 1 1 3
79
16 15
2 1 1 3
0
10
20
30
40
50
60
70
80
90
VMware Citrix(XenSource)
Microsoft Oracle Sun Red Hat Incumbentsystems
managementprovider
# of
resp
onde
nts
Current In 2 years
Source: Goldman Sachs IT Spending Survey.
VMware should continue to dominate the market for server virtualization software over the
next two years, with 79 of our respondents selecting the company as their primary
provider in this high-priority segment, roughly the same number as today. Our checks
continue to be overwhelmingly positive for VMware from both a product and support point
of view. While Microsoft and Citrix have become more competitive in the hypervisor
space, VMware’s suite of advanced management tools and its large number of third-party
software partners set it apart from the competition. At the same time, it appears that
customers will begin to add additional server virtualization solutions into their
environments, with both Citrix and, more dramatically, Microsoft gaining share. In the
next two years, just over 30% of our survey respondents expect to deploy server
virtualization from Citrix and Microsoft, up from 18% today.
November 2, 2008
Goldman Sachs Global Investment Research 20
EMC and IBM remain best positioned among storage vendors to
benefit from server virtualization
Exhibit 23: What is your storage vendor of choice in virtualized server environments?
Oct-08 Aug-08 Jun-08
EMC 36% 42% 40%
IBM 16% 22% 25%
Dell 16% 7% 9%
Hitachi 9% 9% 8%
NetApp 9% 6% 8%
Hewlett-Packard 8% 13% 7%
EqualLogic/Dell 5% 2% 4%
Sun Microsystems 2% 1% 3%
Compellent 1% -- 1%
Source: Goldman Sachs IT Spending Survey.
Our survey results indicate that EMC is still the dominant storage vendor in virtualized
environments although Dell, NetApp, and EqualLogic all saw better results from our panel
in this survey by comparison with previous surveys. Similar to our prior results and
consistent with our checks with storage end users, 36% of the respondents chose EMC as
the preferred storage vendor in virtualized server environments (down slightly from our
August survey), while IBM remained a solid second at 16%. Dell and EqualLogic both
moved up nicely in the latest survey, with Dell moving to 16% from 7% and EqualLogic
moving to 5% from 2% in the latest survey. At the same time, Sun continues to lag behind
other vendors as its storage offerings remain well behind the leaders.
November 2, 2008
Goldman Sachs Global Investment Research 21
Sub-sector focus: Software
Software spending weakened; now in-line with overall budget
expectations
Exhibit 24: In terms of your overall software spending, what do you expect to be the most
likely scenario over the next 12 months?
5%
23%
34%
16%
22%
14%
26%
33%
12%
15%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Up more than 10%
Up 1 to 10%
Same / flat
Down 1 to 10%
Down more than 10%
% of respondents
Oct-08 Aug-08
Source: Goldman Sachs IT Spending Survey.
We are beginning a bi-monthly tracker for software spending. In this second installment,
28% of our respondents are expecting increased software spending over the next year,
well down from the 40% reading in the last survey. This compares to 38% expecting a
decrease, up from 27% in our last survey. Clearly shifting lower, software now ranks about
in line with the overall expectations for IT spending in 2009. However, the change in
sentiment from the last survey is worrying, and suggests that even with the stickiness of
elements such as maintenance and support requirements, software will be cut as budgets
are cut.
Analysis by Goldman Sachs’ Software Research Team, led by Sarah Friar, Sasa Zorovic, and Derek Bingham.
November 2, 2008
Goldman Sachs Global Investment Research 22
Microsoft stronger than overall expectations; new product cycles
likely helping
Exhibit 25: In terms of your level of spending with Microsoft, what do you expect to be
the most likely scenario over the next 12 months?
Up 21 to 50% 3%
Up 11 to 20% 5%
Up 1 to 10% 33%
Same / flat 37%
Down 1 to 10% 5%
Down 11 to 20% 13%
Down 21 to 50% 5%
Source: Goldman Sachs IT Spending Survey.
Among applicable respondents, 41% indicate an expectation of spending growth with
Microsoft over the coming year vs. 23% indicating contraction, a somewhat stronger ratio
of increases to decreases than for software spending as a whole (in the prior exhibit). This
is consistent Microsoft’s lift in the overall software share gainers and laggards. Overall,
we would expect Microsoft to continue to consolidate share, and upgrade cycles such as
Windows Server 2008, SQL Server, and traction with SharePoint Server should continue to
provide momentum to the company’s Server and Tools division – the key area we think
CIOs are responding to in the survey. See Exhibit 26.
Exhibit 26: In the next twelve months, please indicate how you expect your spending will
change for the following Microsoft products, if applicable.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Forefront Security Offerings
System Center (managementofferings)
Search
Exchange Server
Dynamics Apps (including CRM)
Office
Vista
Communications Server
SharePoint Server
Windows Server (including Hyper-V)
SQL Server
Increase No Change Reduce
Source: Goldman Sachs IT Spending Survey.
November 2, 2008
Goldman Sachs Global Investment Research 23
Sub-sector focus: Services
Demand for discretionary IT projects deteriorates to worst levels
tracked
Exhibit 27: In the next six months, how do you think your budgets for discretionary IT
projects that require services from systems integrators, application developers, or other IT
consulting companies, including offshore service providers, will trend?
Not applicable
Up
Down
No change
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%D
ec-0
6
Jan-
07
Feb-
07
Mar
-07
Apr
-07
May
-07
Jun-
07
Jul-0
7
Aug
-07
Sep-
07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
Feb-
08
Mar
-08
Apr
-08
May
-08
Jun-
08
Jul-0
8
Aug
-08
Sep-
08
Oct
-08
Up Down No change Not applicable
Source: Goldman Sachs IT Spending Survey.
Consistent with other leading indicators and macro data points, the survey results
reinforce our guarded stance on discretionary IT spending and budget trends into
2009. Specifically, we believe that a protracted decline in discretionary IT projects
remains a risk for systems integrators, applications developers, and other IT
consulting companies, including offshore service providers on the non-maintenance
components of their revenue streams.
Demand for discretionary services marks a new low point. Since the end of December
2007, we have noted a steady decline in the responses for discretionary IT budgets. This
month’s survey results mark a continuation of this trend to new trough levels, indicating
that demand for discretionary services deteriorated further since the previous survey.
Specifically, the percentage of respondents indicating that budgets will trend up over the
next six months declined sharply to 12% vs. 23% from last survey’s results; this marks the
lowest level recorded in the history of our survey results. On the other hand, the
percentage of respondents indicating that budgets will trend down finished at 49%, which
marks the highest level recorded. More over, on a combined basis the total number of
respondents indicating no change or a down trend on budgets also fell sharply from 53%
Analysis by Goldman Sachs’ IT Services Research Team, led by Julio Quinteros.
November 2, 2008
Goldman Sachs Global Investment Research 24
in the previous survey to 35%, a level that is almost 50% less than the average results of
67% noted in the previous 8 surveys.
Although the survey data collected this time around look rather stark relative to historical
levels, we also acknowledge that they have been inconsistent with the sustained bookings
momentum and revenue growth reported through the September quarter as these results
have finished relatively in line with expectations. We attribute this to the fact that IT
services companies are a lagging indicator and therefore the weakness being captured in
our survey results has yet to get reflected in reported results. In addition, relative to the
last downturn, we believe that the resiliency in reported results so far is in part due to
increased revenue diversification from the perspective of services, vertical and geographic
mix. In addition, many of our companies appear much more in tune and capable of
delivering cost relief, lower cost labor, and other costs rationalization services.
From a sector perspective, in addition to our survey data, we continue to monitor various
leading indicators that we believe are relevant in identifying the pace of the expected
downturn. In particular, we believe that lower headcount growth, reduced hiring targets,
and reduced pricing leverage continue to warrant attention and some caution. In addition,
we believe that any further deterioration in enterprise software spending could further
come home to roost on the growth prospects of the sector.
Near-term risk increases for on-site third-party providers, offshore
remains relatively more insulated but not immune
Exhibit 28: Assuming a cost-constrained or tightening IT budget scenario, in which area of
IT service delivery resources would you look to cut first for application-related
development or maintenance work?
Oct-08 Aug-08 Jun-08 Apr-08 Feb-08
Augmented IT staff providers (e.g., short-
term staffing) 38% 52% 48% 31% 39%
On-site third-party service providers (e.g.,
Accenture, BearingPoint, IBM Services,
etc.) 40% 25% 30% 35% 41%
Offshore third-party service providers (e.g.,
Cognizant) 14% 14% 12% 19% 13%
In-house IT programming staff (e.g.,
internal employees, etc.) 8% 8% 11% 15% 8%
Source: Goldman Sachs IT Spending Survey.
Our data continue to suggest that offshore third-party service providers are relatively
more insulated versus their on-site peers in a cutting scenario. Results from this survey
continue to suggest that, in a cost-constrained IT budget scenario, CIOs will most likely
look to cut their resources first from on-site third-party service providers, followed by
augmented IT staff providers for application-related development or maintenance work.
On a relative basis, offshore and in-house remain more insulated.
At 40%, the risk for on-site third-party service providers providing application-related
development or maintenance work appears to have increased and now represents the first
in-line of service providers expected to be cut. At 14%, we view the relative insulation of
the offshore companies as a direct reflection of the lower cost basis provided and
recurring nature of the application maintenance/outsourcing work provided. However, we
November 2, 2008
Goldman Sachs Global Investment Research 25
continue to believe that the more discretionary application development work, which
makes up 40% of revenue remains relatively exposed and is the source behind the rapid
decrease in revenue growth for most offshore vendors.
Appetite for offshore services remains below trend, consistent with
reported results and supporting our Cautious view
Exhibit 29: Do you expect to move a material amount of work (i.e., more than 10%) that
you currently outsource to system integrators to an offshore environment in the next one
to three years? (The work moved could be either with the same US-based integrator or to
an Indian firm.)
32%
6%
15% 15%15%
20%
16%
21%23%22%22%
20%
8%
16% 16%21%
24%
18%
30%
18%
17%12%
8%
11%13%14%
17%
14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Oct
-08
Jun-
08
Feb-
08
Oct
-07
Jun-
07
Feb-
07
Aug
-06
Apr
-06
Dec
-05
Aug
-05
Apr
-05
Dec
-04
Aug
-04
Apr
-04
% o
f Res
pond
ents
Yes No
Source: Goldman Sachs IT Spending Survey.
Together with recently reported results, and reduced growth expectations from
offshore companies, we believe that this survey’s data suggest near-term demand
risk remains high for offshore spending trends due to project deferrals, delayed
decision making, and reduced pricing leverage.
This month’s survey results posted a sequential decline from the last survey, finishing with
8% of respondents indicating that they expected to move a material amount of work to an
offshore environment. We note that the percentage of respondents indicating that they do
not expect to move a material amount of work offshore remains elevated at 72%,
reinforcing our cautious view as pressures on growth in offshore services will likely persist
in the next several quarters.
November 2, 2008
Goldman Sachs Global Investment Research 26
Appetite for new offshore services posts a modest decline, an
indication of waning penetration opportunity for offshore services
Exhibit 30: Recently, offshore companies have become more aggressive in marketing
their capabilities in new areas such as infrastructure management, software R&D,
business process outsourcing, and consulting. In the next 12 months, are you likely to
consider offshore delivery for IT services outside of traditional application maintenance
and development?
15%
24%26%
20%21%
33%
17%22%
24%22%
25%30%
27%24%
38%
28%24%
26%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Oct
-08
Aug
-08
Jun-
08
Apr
-08
Feb-
08
Dec
-07
Oct
-07
Aug
-07
Jun-
07
Apr
-07
Feb-
07
Dec
-06
Aug
-06
Jun-
06
Apr
-06
Feb-
06
Dec
-05
Oct
-05
% o
f Res
pond
ents
Will consider
Will not consider
Source: Goldman Sachs IT Spending Survey.
Consistent with our previous commentary, the adoption of newer services remains key to
the long-term growth profile of offshore services, as over time the continued penetration
of these services and the relatively faster growth rates should help offset the more mature
and now slower-growing areas in application maintenance and outsourcing. In most cases,
these services are still growing more than the traditional application maintenance and
development work and collectively remain an important source of long-term growth
opportunity.
The percentage of respondents indicating that they would consider offshore delivery
for IT services outside of traditional application maintenance and development
finished at 22%, down modestly from 24% in the previous survey, but above the
trough levels noted in April and June. The percentage of respondents indicating that
they will not consider new offshore services finished at 53%, about flat from 54% noted in
the previous survey. Finally, the percentage of Unsure/Not applicable responses increased
from the previous survey and remains elevated at 25% (versus an average of about 15% in
our previous surveys), suggesting heightened uncertainty and stagnation of near-term
spending plans.
November 2, 2008
Goldman Sachs Global Investment Research 27
Sub-sector focus: Networking
Network equipment spending resumed its downward trend in
October following the rebound in August
Exhibit 31: In terms of your overall network equipment spending, what do you expect to
be the most likely scenario over the next 12 months?
0%
10%
20%
30%
40%
50%
60%
70%
80%
Dec-03
Feb-04
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Feb-05
Apr-05
Jun-05
Aug-05
Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Jan-07
Feb-07
Apr-07
June-0
7
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
% o
f Res
pond
ents
Down
Up
Flat
Unsure
Source: Goldman Sachs IT Spending Survey.
As in past surveys, we asked our respondents about their plans for overall network
equipment spending over the next 12 months. The responses reflect a deteriorating
environment, with a meaningful drop in the percentage of respondents who expect their
spending to increase from 53% in August to 48% in October. In addition, the percentage of
respondents who expect their spending to decline increased from 13% to 19%. The
findings from the survey are consistent with our belief that given the increased probability
that we are now in a recession, overall network spending will likely decline in the United
States over the next several quarters. The findings are consistent with our below-
consensus estimates for companies in our coverage with significant enterprise networking
exposure, such as Cisco, Juniper, Riverbed, and Aruba Networks. We recommend that
investors remain on the sidelines for all these stocks except for Cisco, where we believe
the impact to estimates will be partially muted by the company’s continued share gains, as
CIOs continue to consolidate their spending around their largest, and most strategic
vendors.
Analysis by Goldman Sachs’ Networking Research Team, led by Simona Jankowski and Thomas Lee.
November 2, 2008
Goldman Sachs Global Investment Research 28
Spending on Cisco products also impacted, but shows some
resilience
Exhibit 32: In terms of your level of spending on Cisco products, what do you expect to be
the most likely scenario over the next 12 months?
0%
10%
20%
30%
40%
50%
60%
70%
80%
Dec-03
Feb-04
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Feb-05
Apr-05
Jun-05
Aug-05
Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Jan-07
Feb-07
Apr-07
June-0
7
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
% o
f Res
pond
ents
Down
Up
Flat
Unsure
Source: Goldman Sachs IT Spending Survey.
Similar to the overall network equipment spending trends, our respondents’ outlook for
spending on Cisco products also deteriorated. In the October reading, 48% of respondents
expect to increase spending on Cisco products in the next 12 months, down from 53% in
August. Moreover, the number of respondents who expect to reduce their spending on
Cisco grew from 11% to 20%, the highest reading in over four years. On balance, the
results show some level of resilience, as the number of respondents who expect to
increase their spending remains fairly close to the 50-70% range that we consider healthy,
and within the range of the prior readings in 2008.
Historically, our survey results have been relatively well correlated to Cisco’s out-quarter
guidance and qualitative comments on the call. Therefore, we view the results as
consistent with our below-consensus estimates for Cisco, and expect them to be reflected
in lower guidance for the January quarter. In particular, we expect Cisco to guide for
2QFY09 (January) yoy sales growth in the 3% range, well below the consensus estimate of
7% and Cisco’s guidance of 8.5%. We also remain comfortable with our full year FY2009
(July) sales growth estimate of 3%, well below consensus of 8%.
That said, we maintain our CL-Buy rating on Cisco, as we see compelling value in the stock
at 13.7X our below-consensus CY2009 GAAP EPS estimate. We believe Cisco will remain
one of the strongest franchises in the Technology sector long term given its solid
execution in a number of markets that benefit from favorable secular tailwinds. Moreover,
while we expect estimates to continue to come down, we believe the company has more
of a cushion than most of its peers, given Cisco’s conservative guidance and market share
gains through the downturn.
November 2, 2008
Goldman Sachs Global Investment Research 29
Incrementally negative for RIM: Interest in Microsoft-based devices
accelerating with iPhone steadily improving
We asked our respondents about their plans to deploy wireless email devices over the next
12 months. The October results were incrementally negative for RIM on three fronts.
• Interest in BlackBerry only deployments decreased significantly since August. The
percentage of respondents expecting to offer only BlackBerry devices to their
employee base declined significantly to 32% from 44% in August.
• Interest in Microsoft-enabled devices increased significantly since August. The
percentage of respondents who are currently using BlackBerry devices but will also
enable Microsoft-based devices increased considerably to 26% from 16% in August.
These results are consistent with our checks that an increasing number of enterprises
are looking at Microsoft as a potential second source of their wireless email
deployment, due to their desire to diversify their wireless e-mail supplier base.
Additionally, with a number of key smartphone vendors adopting Microsoft as their
business OS (HTC, Motorola, Palm), we believe lower smartphone ASPs (driven by a
wider availability of devices) could be another reason why enterprises are taking a
greater interest in Microsoft-enabled devices.
• iPhone adoption continues to gain traction. Interest in the Apple iPhone continued
to increase as 10% of our respondents said they will enable iPhone devices alongside
BlackBerry compared to 8% in August and 4% in June. This is also consistent with our
anecdotal checks which reveal that some enterprises may be looking to enable the
iPhone as part of their wireless device fleets.
Lastly, unlike the last few surveys, we saw a much greater number of respondents that
were NA/Unsure (10% vs 0% in August/June) about their plans for email device
deployment over the next 12 months. We believe this is likely attributed to the level of
uncertainty that CIOs have about their current IT budgets given the present macro
environment. CIOs may look curtail spending on new wireless email devices by either
lengthening the replacement cycle and/or delaying purchases for new wireless email
devices.
While the IT survey results have negative implications for RIM’s enterprise business, we
continue to believe that RIM will still maintain a strong position in this segment though it
may cede some of its dominant share in North America to Microsoft-based devices and the
iPhone over the next few years. We believe the decrease in share will more than likely be
offset by an overall increase in penetration of wireless e-mail in enterprises, which
currently stands at only 5% of a base of 600 million enterprise e-mail accounts. As the
overall market penetration expands, in particular outside North America, we expect RIM
will continue to benefit from strong growth in that segment despite having to share some
of the incremental market growth with Microsoft/Apple.
November 2, 2008
Goldman Sachs Global Investment Research 30
Exhibit 33: What wireless email devices do you plan to deploy over the next 12 months?
0%
4%
8%
3%
6%
6%
4%
23%
46%
0%
5%
10%
5%
6%
6%
8%
16%
44%
10%
2%
6%
2%
5%
7%
10%
26%
32%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
NA/Unsure
We do not plan to deploy anywireless email devices over the next
12 months
We currently use a combination ofdevices
We currently use Microsoft-baseddevices but will also enable iPhone
We currently use Microsoft-baseddevices but will also enable
BlackBerry
Microsoft-based devices only
We currently use BlackBerry but willalso enable iPhone
We currently use BlackBerry but willalso enable Microsoft-based devices
BlackBerry only
% of total responses
June August October
Source: Goldman Sachs IT Spending Survey.
Enterprise outlook for RIM remains weak
We asked our respondents about their plans to increase their BlackBerry subscriber base
over the next six months. The survey results suggest a negative outlook, as 16% of our
respondents (versus 25% in the August survey) expect their subscriber base to grow
double digits over the next six months. The distribution of responses within that
percentage continues to be unfavorable, with 0% of subscribers (down from 1% in August
and 6% in June) expecting to increase their subscriber base by over 26%. We believe our
November quarter estimates are inline with the survey results as we are forecasting RIM’s
enterprise subscribers to grow only 1% qoq, compared to 8% in the August quarter.
Similar to the above question, we believe the current macro headwinds are causing
increased uncertainty with CIOs, as 3% of respondents were unsure about their 6-month
outlook, compared to 0% in the prior three readings.
November 2, 2008
Goldman Sachs Global Investment Research 31
Exhibit 34: If applicable, by what percentage will you increase your Blackberry subscriber
base in the next 6 months?
0%
25%
0%
0%
0%
0%
16%
59%
0%
18%
3%
0%
3%
3%
20%
53%
0%
22%
0%
1%
0%
0%
24%
53%
3%
26%
1%
0%
0%
0%
16%
54%
0% 10% 20% 30% 40% 50% 60% 70%
NA/Unsure
0% - Do not use BlackBerry
Decrease
Greater than 75%
51% to 75%
26% to 50%
11% to 25%
1% to 10%
% of total responses
April June August October
Only 16% of respondents expect double digit growth
(25% in August)
Source: Goldman Sachs IT Spending Survey.
We also asked our respondents about their plans to upgrade devices for their current
BlackBerry subscriber base over the next six months. The survey results for replacement
sales were not quite as negative as the new subscriber results. While only 44% of
respondents (versus 51% in August) plan to upgrade BlackBerry devices of just 1-10% of
their users, 33% of respondents (versus 30% in August) expect to upgrade a double-digit
percentage of their users.
In our own estimates, we have assumed a slightly higher replacement rate as a percentage
of total subscribers in the November quarter relative to May, which is driven mostly by an
increase in consumer upgrades as early Pearl users begin to roll off their two-year
contracts. In our view, the uncertain macro environment will likely reduce enterprise
spending on device upgrades, lengthening the replacement cycle. Therefore, we believe
replacement demand will likely be driven more by consumer subscribers, as RIM expands
its consumer offering with devices such as the BlackBerry Pearl Flip and Storm (its new
touch screen smartphone).
The bottom line is that our latest survey’s results reinforce our confidence in our below-
consensus estimates for RIM. Our FY2010 (February) EPS estimate of $3.62 is 23% below
consensus of $4.73, on lower revenues driven by fewer new subscribers and a longer
replacement cycle, as well as over 200 bp in margin compression. However, we believe
RIM’s valuation more than reflects the risk to Street estimates, at 13X our own below-
consensus EPS and 11X the consensus estimate. We view these multiples as greatly
undervaluing RIM’s earnings potential, as we estimate a long-term annual EPS growth rate
in the high teens, driven by continued share gains in the fast-growing smartphone market,
partly offset by margin compression. Therefore, we maintain our Buy rating on the stock.
November 2, 2008
Goldman Sachs Global Investment Research 32
Exhibit 35: If applicable, what percentage of your Blackberry installed base will get a
device upgrade in the next 6 months?
23%
0%
0%
0%
6%
25%
46%
19%
2%
3%
5%
9%
19%
43%
19%
0%
0%
2%
6%
22%
51%
23%
0%
0%
3%
9%
21%
44%
0% 10% 20% 30% 40% 50% 60%
0% - Do not use BlackBerry
Only Pay For Service, NotDevices
Greater than 75%
51% to 75%
26% to 50%
11% to 25%
1% to 10%
% of total responses
April June August October
Source: Goldman Sachs IT Spending Survey.
Respondent overview
This is the 43rd issue of our IT Spending Survey series, conducted in mid-October 2008.
Our survey panel comprises a controlled group of 100 IT executives from Fortune 1000
companies. The current survey results reflect the following:
Exhibit 36: Respondent demographics
By title: By company revenues: By number of employees worldwide:CIO 56% Over $10 billion 20% Over 100,000 10%Director of MIS/IT 20% $1-$10 billion 31% 50,000 to 100,000 15%Vice President of IT/IS 18% $500 million-$1 billion 32% 10,000 to 50,000 23%IT Manager 2% $0-$500 million 16% 5,000 to 10,000 36%CTO 2% Less than 5,000 15%Other 2%
Source: Goldman Sachs IT Spending Survey.
In terms of industry breakdown for the surveyed companies, our goal is to roughly
mirror our estimate of vertical end-market demand for information technology.
November 2, 2008
Goldman Sachs Global Investment Research 33
Exhibit 37: Respondents by vertical industry vs. our estimates of end-demand share
Source: Goldman Sachs IT Spending Survey, Goldman Sachs Research estimates.
Our survey captures the most significant IT spending verticals.
November 2, 2008
Goldman Sachs Global Investment Research 34
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Goldman Sachs Global Investment Research 35
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Ratings, coverage views and related definitions prior to June 26, 2006
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Definitions
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Goldman Sachs Global Investment Research 36
Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months.
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November 2, 2008
Goldman Sachs Global Investment Research 37
US Technology Strategy
Sarah Friar Sarah Friar, managing director, joined Goldman Sachs in July 2000. She is the Business Unit Leader of the Technology Research Group, as well as the lead analyst for the Software sector. Sarah became a managing director in 2006. Prior to joining Goldman Sachs, she worked at McKinsey & Co. in both London and South Africa. Sarah has a Master’s of Engineering from Oxford University and an M.B.A. from Stanford Graduate School of Business, where she graduated as an Arjay Miller scholar.
James Covello Jim Covello, managing director, joined Goldman Sachs in July 2000. He is the Business Unit Leader of the Technology, Media and Telecom Team, as well as the lead analyst for the Semiconductor Devices and Semiconductor Capital Equipment sectors. Jim became a managing director in 2004. He has been recognized by both Institutional Investor magazine and the Greenwich Survey as one of the leading analysts covering the sector. Prior to joining the firm, Jim worked in the Investment Banking divisions of SG Cowen and Smith Barney. He earned an M.B.A. from The Tuck School at Dartmouth College, where he was awarded distinction as a Tuck Scholar. Jim earned his B.A. Phi Beta Kappa, Magna Cum Laude in American Government from Georgetown University, where he graduated with distinction as a Baker Scholar.
Derek Bingham Derek Bingham, vice president, joined Goldman Sachs in 1999. He works in the Technology Research Group covering Infrastructure Software and Technology Strategy. Prior to joining the Investment Research division in 2001, he spent two years in Goldman Sachs’ Technology Investment Banking Group. Derek holds an M.B.A. from Stanford University and a B.A. in economics from Princeton University.
